VILLICANA v. EVANSTON INSURANCE COMPANY (1994)

Plaintiff and appellant Margaret Sue Villicana, a real estate broker, appeals from a summary judgment in favor of defendants and respondents Evanston Insurance Company and Shand Morahan & Company, Inc. (collectively referred to as Insurers).   In her complaint, appellant alleged Insurers had breached their obligations to her in defending an action for negligent and intentional misrepresentation brought against her by purchasers of real property.   In the action brought by the purchasers against appellant, no judgment was rendered against appellant;  appellant voluntarily settled with the purchasers in the middle of trial without Insurers' consent.   Appellant sought reimbursement of the amount of the settlement from Insurers.   Insurers contend they provided appellant with a complete defense of the underlying action and the “no action” clause of the insurance policy bars an action against them for failure to reasonably settle the underlying action.   Appellant asserts a conflict of interest arose between her and Insurers entitling her to independent counsel when Insurers reserved their rights to deny coverage for damages resulting from intentional misrepresentation.   She contends Insurers are estopped from asserting the policy's “no action” clause as a bar to her action by their failure to provide her with independent counsel to defend against the underlying action.   We conclude Insurers have failed to establish the application of the policy's “no action” clause as a complete defense to the action.   We reverse.

FACTS AND PROCEDURAL BACKGROUND 1

The Underlying Case

Appellant, a licensed real estate broker, was insured by Insurers for professional malpractice in the amount of $1 million.   In 1981, during the operative period of coverage, appellant was sued by Josephine A. Cory and Troy Cory.   The Corys alleged appellant, acting as a broker for the sellers in connection with a 1980 sale of real property to the Corys, intentionally and negligently misrepresented the size of the 1.88-acre property to be 2.7 acres.

Appellant tendered defense of the action to Insurers.   On June 5, 1981, Insurers sent appellant a reservation of rights letter informing her they had hired the law firm of Haight, Brown & Bonesteel (Haight Brown) to represent her.   The letter notified appellant the insurance policy contained a specific exclusion for claims based upon fraud and she would not be indemnified for punitive damages:  The “facts of the claim being made against you give rise to allegations of Fraud.  [¶] ․ [N]o coverage is or will be provided under your policy for any loss assessed for Fraud․  [¶] Should you be uncertain as to the nature of the allegations or our interpretation thereof, please contact the writer immediately․  [¶] In addition, please be advised that current law in your state prohibits [us] from indemnifying against a final adjudication awarding punitive or exemplary damages․  [¶] Although certain causes and measures of damages are excluded from loss coverage under the policy, [we are] providing a defense to these causes on your behalf.   Such defense is afforded with the understanding that no coverage is afforded for any damages asserted for such causes.   You are, of course, entitled to employ counsel, at your own expense, to associate with appointed counsel and further protect your interest in these matters.”   A similar letter, dated October 22, 1981, was also sent to appellant.   Appellant received the two letters.

In 1982, informal settlement discussions “in the neighborhood [of] $200,000 to $300,000” took place between Insurers and the Corys.   Insurers did not believe settlement was likely because the Corys had exhausted five different attorneys and were currently represented by a relative who had recently graduated from law school.   Insurers also believed there was little risk of appellant's liability.   In June 1984, the Corys made a statutory offer to compromise in the amount of $750,000.   This settlement offer was not communicated to appellant and was not accepted by Insurers.

In 1985, Haight Brown filed a summary judgment motion on appellant's behalf;  this motion was granted by the trial court.   This appellate district reversed the summary judgment in Cory v. Villa Properties (1986) 180 Cal.App.3d 592, 225 Cal.Rptr. 628.   The appellate court concluded statements made by appellant regarding the size of the property were actionable.   The appellate court also discussed the proper measure of damages in a case based upon misrepresentation.   The property had been purchased by the Corys for $705,000.   Exclusive of the additional land which the Corys believed they had purchased the property was worth $850,000.   Thus, the property was worth more than the Corys paid for it.   Based on these facts, the appellate court concluded the Corys had suffered no “out-of-pocket” loss, but were entitled to any additional damages they may have suffered, such as lost profits from an anticipated subdivision and sale of a larger parcel.

Haight Brown considered damages to be one of the Corys' weakest issues.   Haight Brown opined that the Corys' case was worth less than $300,000.   A May 1986 letter from Haight Brown to appellant explained the appellate court decision.   The letter also stated that, based upon Haight Brown's review of the facts, the Corys' claim for punitive damages was without merit since the misrepresentations regarding the size of the property had been made without intent or malice.

In a 1986 interoffice memorandum written after the appellate court decision, Insurers noted settlement possibilities might be pursued, but at that time thought it was best to “sit back and let [the Corys] make the first move.”   A July 25, 1988 letter directed to appellant reiterated Insurers' reservation of rights.   It was sent to an incorrect address, however, and was not received by appellant.   Although the letter included a brief discussion of the appellate court decision, it primarily repeated the substance of the two previously received reservation of rights letters regarding intentional fraud and punitive damages and also stated Insurers' willingness to continue to defend.   In a 1988 interoffice communication, Insurers commented that liability might ultimately be imposed against appellant for fraud.   The memorandum emphatically stated, however, that “our duty to defend continues under the terms of the insurance policy.”  (Emphasis in original.)

The trial court denied the Corys' motion to determine as a matter of law appellant's liability for misrepresentation.   In July 1989, the Corys' statutory settlement offer was increased to $1 million.   This settlement offer was not accepted by Insurers.   A July 10, 1989 letter from Haight Brown to appellant stated the trial court had denied the Corys' request to find actionable misrepresentation as a matter of law.   The letter also informed appellant of the $1 million statutory settlement offer.   In January 1990, appellant gave Insurers her consent to settle with the Corys for an amount not to exceed $50,000.   No settlement was effected.   The Corys asserted compensatory damages of $1.7 million in addition to punitive damages.

The case proceeded to trial.   The trial was bifurcated;  it first proceeded on the issue of liability.   On Friday, May 11, 1990, the jury returned two special verdicts concluding appellant had made intentional and negligent misrepresentations.   Haight Brown advised appellant that the jury's verdict on intentional misrepresentation put appellant's substantial personal assets at stake and the verdict could be large.   Appellant's net worth was approximately $20 to $30 million.   In light of the special verdicts, Haight Brown again advised appellant she might want to consider retaining her own attorney.

In a letter dated May 13, 1990, Attorney Thomas Hogue informed Haight Brown he had been retained by appellant.   The letter also stated appellant had not received notification of the Corys' 1984 $750,000 statutory offer to compromise, asserted appellant had been entitled to independent counsel paid for by Insurers because conflicts of interest existed and questioned whether Haight Brown's trial strategy of denying liability might have angered the jury, resulting in the intentional fraud finding.

In a letter dated May 14, 1990, Haight Brown asked appellant to prepare financial information as quickly as possible and advised appellant she “may wish to consider whether to retain [her] own personal counsel to provide [her] with any assistance and advice․”  Haight Brown indicated it was ready to move into the damage phase of the trial, in which appellant's evidence that the Corys had suffered no damages as a result of the misrepresentation could be presented.

Thereafter, Attorney Hogue demanded Insurers settle the case by paying the Corys the policy limits, $1 million.   He also stated that if Insurers would not pay that sum, appellant would fund the settlement out of her own money and then sue Insurers for reimbursement.   Insurers did not consent to the settlement.   Haight Brown remained neutral.   Appellant offered to settle with the Corys for $1 million.   Insurers agreed to contribute $400,000 to the settlement.   This $400,000 was $100,000 more than their highest estimate of compensatory damages.   Insurers believed the balance of the settlement reflected punitive damages.

On May 15, 1990, the Corys accepted appellant's $1 million offer to settle the case.   A release drafted by Haight Brown, effective May 15, 1990, formalized the settlement.   The release obligated appellant to pay the Corys $1 million.   It was executed by appellant, the Corys, an attorney on behalf of the Corys, and Haight Brown on behalf of appellant.   The release noted that prior to the conclusion of the jury trial, the Corys dismissed the cause of action for intentional misrepresentation.   It also released “any and all insurance carriers” of appellant.   Subsequently, Insurers paid $400,000 and appellant paid $600,000 toward the settlement.   The Corys dismissed the entire action against appellant with prejudice.

In a letter to appellant dated May 18, 1990, Insurers expressed their understanding of the settlement.   They also explained the basis for their refusal of the $1 million demand and their decision to contribute only $400,000 toward the settlement.   The letter provided:  “[After the jury returned its special verdicts, i]t appeared certain that any compensatory damages award would not approach the $1 million policy limit.   We therefore assumed that [appellant's] demand that [we] pay up to $1 million to settle the claim was motivated solely by concern over the possibility that the jury would make a punitive damages award, based upon its finding of intentional misrepresentation․  [¶] ․ [Based upon case law, a]s long as the insurer exercises good faith in valuing the covered claims, it owes no duty to settle within policy limits simply to avoid exposing the insured to the uncovered, punitive damages claim․  [¶] ․ [We] offered $400,000 to settle[,] which figure represented approximately $100,000 more than our expert's highest estimate of compensatory damages, to demonstrate [our] good faith willingness to settle.  [¶] ․ [An insurer is not required] to offer an amount equivalent to the highest possible estimate of damages rendered by the claimant's expert witness.  [¶] ․ [An insurer is] specifically prohibited from indemnifying its insured for punitive damages awards․  [¶] ․ [W]e understand that as part of the settlement agreement, you have asked [the Corys] to dismiss their causes of action based upon intentional misrepresentation.  [We] understand that this may be a desirable result for reasons totally unrelated to coverage under the policy;  however, please be advised that for the purpose of analyzing coverage for the settlement, [we do] not intend to be bound by any characterization or apportionment of the settlement payment which is simply agreed by the parties to the litigation.”

The Action Against Insurers

Appellant filed her multi-count complaint against Insurers and Haight Brown on May 10, 1991.   In her amended complaint, she asserted causes of action against Insurers for breach of contract, breach of the covenant of good faith and fair dealing, declaratory relief, negligent infliction of emotional distress and fraud.²  Appellant's prayer for damages included the $600,000 of the Cory settlement for which Insurers had failed to reimburse her.   She also sought emotional distress and other consequential damages.

The complaint alleged the following.   Upon being sued by the Corys, appellant sought coverage from Insurers.   Insurers failed to inform appellant a conflict of interest existed between them entitling her to independent counsel at their expense, failed to employ independent counsel for appellant, unreasonably failed to settle both before and during trial and failed to properly evaluate appellant's net worth.   After the special verdicts were rendered against appellant, Insurers failed to reasonably resolve the matter by settling within the policy limits.

Haight Brown filed a motion for summary judgment, which was joined by Insurers.³  Insurers and Haight Brown argued they could not be responsible for any of the losses suffered by appellant since there had been no judgment after trial and the settlement agreement between appellant and the Corys had been voluntary and unconsented to by Insurers.

The insurance policy included a “no action” clause.   This clause provided:  “[N]o action shall lie against [Insurers] unless, as a condition precedent thereto, the Insured shall have fully complied with all terms of the policy, nor until the amount of the Insured's obligation to pay shall have been fully and finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant and [Insurers].”

Haight Brown admitted, “the Haight [Brown] defendants may have drafted the necessary release documents and approved the ‘form and content’ of same,” but denied these actions implied “that the settlement was somehow entered with the authorization and approval of any defendant.”   Haight Brown asserted it had merely been following the instructions of its client, appellant.

Appellant submitted opposition to the summary judgment motion supported by her declaration and other documents.   Appellant contended Insurers were estopped from asserting the “no action” clause.   Appellant argued there had been confusion as to whom Haight Brown had represented during the settlement discussions.   Appellant also claimed Insurers had breached their obligations under the insurance policy by failing to properly evaluate and investigate the case, failing to advise her of settlement offers, failing to reasonably settle the case, failing to adequately represent her interests, failing to provide her with conflict-free counsel and issuing a defective reservation of rights letter.   Appellant argued the settlement had been neither voluntary on her part, entered into unilaterally, nor collusively devised with the Corys.

Ruling on Summary Judgment

The trial court's June 4, 1993 minute order granted the summary judgment motion in favor of Insurers and denied it as to Haight Brown.   An order for entry of summary judgment was filed on July 13, 1993.   The order stated there were no triable issues of fact “for the following reasons:  [¶] 1. It is undisputed that the policy of insurance entered into between [appellant] and [Insurers] contains a provision which provides that no action against [Insurers] by [appellant] shall lie unless the amount of [appellant's] liability in the underlying ․ matter was ‘fully and finally determined either by Judgment against [appellant] after actual trial or by written agreement of [appellant], the claimant and [Insurers].’  [¶] 2. Each of [appellant's] causes of action against [Insurers] ․ relate[s] to [appellant's] voluntary personal contribution to settlement in the underlying ․ action.  [Insurers] did not consent to [appellant's] voluntary contribution to settlement.   Accordingly, each of [appellant's] causes of action against [Insurers] [is] barred pursuant to the subject contractual provision and California law.  Finkelstein [v.] 20th Century Ins[.] Co. (1992) 11 Cal.App.4th 926, 928–930 [14 Cal.Rptr.2d 305];  Rose [v.] Royal Ins[.] Co. (1991) 2 Cal.App.4th 709, 714 [3 Cal.Rptr.2d 483];  Wright [v.] Firem[aln's Fund Ins[. Companies] (1992) 11 Cal.App.4th 998, 1010, 1011 [14 Cal.Rptr.2d 588];  Doser [v.] Middlesex Mutual Ins[.] Co. (1980) 101 Cal.App.3d 883, 891–892 [162 Cal.Rptr. 115].”   A judgment was entered on July 13, 1993, from which appellant appeals.⁴

DISCUSSION

The gravamen of appellant's complaint is that she is entitled to be reimbursed by Insurers for the $600,000 she contributed to the settlement, because Insurers unreasonably failed to settle the Cory litigation forcing her to settle it herself.   Insurers claim the policy's “no action” clause provides them with a complete defense to appellant's action.   However, case authority makes clear an insurer may not assert the “no action” clause as a defense if the insurer has failed to provide the insured with a defense of the underlying action.   Insurers point out that they provided appellant with a complete defense to the Cory litigation by hiring Haight Brown to represent her.   Appellant counters that as a result of a conflict of interest arising out of Insurers' reservation of rights to refuse to indemnify for intentional misrepresentation, she was entitled to independent counsel at Insurers' expense.   She argues that the failure to provide independent counsel where required constitutes a failure to provide a defense and a breach of the policy, which estops Insurers from asserting the “no action” clause.   Insurers reply that no conflict of interest existed and no obligation to provide independent counsel existed at the outset of the Cory litigation.

Standard of Review

“Summary judgment is proper if the supporting papers are sufficient to sustain a judgment in favor of the moving party as a matter of law and the opposing party presents no evidence giving rise to a triable issue as to any material fact.  (Code Civ.Proc., § 437c, subd. (c).)  To prevail on a summary judgment motion, the defendant must conclusively negate a necessary element of the plaintiff's case or establish a complete defense.  [Citation.]  A defendant has met his or her burden of showing a cause of action has no merit if that party has shown one or more elements of the cause of action, even if not separately pleaded, cannot be established, or that there is a complete defense to that cause of action.   Once the defendant has met that burden, the burden shifts to the plaintiff to show a triable issue of one or more material facts exists as to that cause of action.  (Code Civ.Proc., § 437c, subd. (n)(2).)   Where the evidence presented by defendant does not support judgment in his favor, the motion must be denied without looking at the opposing evidence, if any, submitted by plaintiff.  [Citation.]  The evidence of the moving party is strictly construed and that of the opposing party liberally construed.   [Citation.]  ․ In reviewing a grant of summary judgment, an appellate court must make its own independent determination of the construction and effect of the papers submitted.”  (Nichols v. Keller (1993) 15 Cal.App.4th 1672, 1681–1682, 19 Cal.Rptr.2d 601.)⁵

“No Action” Clause

Insurers contend the “no action” clause of the policy is a complete defense to appellant's action against them.   By its terms, the “no action” clause of the policy bars an action by the insured against the insurer unless a third-party judgment after trial has been entered against the insured, or the insurer has given its written consent to a settlement.   Insurers point to the absence of any judgment after trial or their written consent to a settlement.   Appellant counters that Insurers are estopped to assert the “no action” clause as a defense to her action by their failure to provide her with independent counsel.

If an insurer unreasonably fails to settle a case within the policy limits, and the insured is damaged as a result of this breach by a judgment after trial in excess of the policy limits, the insured has a cause of action against the insurer for reimbursement of the excess judgment.  (Doser v. Middlesex Mutual Ins. Co. (1980) 101 Cal.App.3d 883, 890, 162 Cal.Rptr. 115.)   If, however, an insurer unreasonably fails to settle a case within the policy limits, and the insured voluntarily settles with a third-party claimant without the insurer's consent, the policy's “no action” clause may bar the insured's action against the insurer for reimbursement of the settlement amount.   (Finkelstein v. 20th Century Ins. Co. (1992) 11 Cal.App.4th 926, 929, 14 Cal.Rptr.2d 305;  Clark v. Bellefonte Ins. Co. (1980) 113 Cal.App.3d 326, 336, 169 Cal.Rptr. 832;  Doser v. Middlesex Mutual Ins. Co., supra, 101 Cal.App.3d 883, 162 Cal.Rptr. 115;  Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 1112, 7 Cal.Rptr.2d 131;  Rose v. Royal Ins. Co. (1991) 2 Cal.App.4th 709, 714, 3 Cal.Rptr.2d 483;  Wright v. Fireman's Fund Ins. Companies, supra, 11 Cal.App.4th at pp. 1010–1011, 14 Cal.Rptr.2d 588;  compare with Fortman v. Safeco Ins. Co. (1990) 221 Cal.App.3d 1394, 1399, 271 Cal.Rptr. 117;  Continental Casualty Co. v. Royal Ins. Co. (1990) 219 Cal.App.3d 111, 268 Cal.Rptr. 193;  Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 244 Cal.Rptr. 655, 750 P.2d 297;  Camelot By the Bay Condominium Owners' Ass'n. v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33, 32 Cal.Rptr.2d 354.)

The policy's “no action” clause is not a bar to the insured's action against the insurer for the settlement amount, however, even in the absence of a judgment after trial, where the insurer denied coverage or failed to defend and there was no fraud or collusion on the part of the insured.  (Sanchez v. Truck Ins. Exchange (1994) 21 Cal.App.4th 1778, 1787, 26 Cal.Rptr.2d 812;  Pacific Estates, Inc. v. Superior Court (1993) 13 Cal.App.4th 1561, 1568, fn. 6, 17 Cal.Rptr.2d 434;  Zander v. Texaco, Inc. (1968) 259 Cal.App.2d 793, 799, 804–806, 66 Cal.Rptr. 561;  cf. Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 228, 236–242, 178 Cal.Rptr. 343, 636 P.2d 32;  Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 884–886, 151 Cal.Rptr. 285, 587 P.2d 1098;  Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal.App.4th 501, 549, 15 Cal.Rptr.2d 726.)   Even though an insurance policy precludes insurers from settling claims without the consent of the insurer, the insured is permitted to make a good faith, reasonable settlement when the insurer wrongfully denies coverage or refuses to defend.   In these situations, the insurer is estopped from asserting the “no action” clause.  (Diamond Heights Homeowners Assn. v. National American Ins. Co. (1991) 227 Cal.App.3d 563, 581, 277 Cal.Rptr. 906.)

Independent Counsel

An insurer is obligated to provide an insured with a defense to a third party's lawsuit when there exists a potential for liability under the policy.   (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 276–277, 54 Cal.Rptr. 104, 419 P.2d 168.)   An insurer's obligation to defend may be broader than its obligation to indemnify.  (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)   Some or all of the allegations in a complaint may potentially fall outside the scope of coverage under the policy.  (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 364, 208 Cal.Rptr. 494.)   Under these circumstances, an insurer may provide a defense under a reservation of rights, agreeing to defend, but promising to indemnify only for conduct covered by the policy.  (Ibid.)

Ordinarily, an insurer provides a defense to its insured by hiring competent defense counsel, who represents the interests of both the insurer and the insured.  (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d at p. 364, 208 Cal.Rptr. 494.)  “In the usual tripartite relationship existing between insurer, insured and counsel, there is a single, common interest shared among them.   Dual representation by counsel is beneficial since the shared goal of minimizing or eliminating liability to a third party is the same.”  (Ibid.;  accord, Purdy v. Pacific Automobile Ins. Co. (1984) 157 Cal.App.3d 59, 76, 203 Cal.Rptr. 524.)

In some cases, a conflict of interest may arise between the insurer and the insured.  (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d at p. 375, 208 Cal.Rptr. 494.)   Where such a conflict of interest exists, defense counsel may not be permitted to represent both the insurer and the insured.   The insurer may be required to provide the insured, at the insurer's expense, with independent counsel, who then controls the litigation.  (Ibid.;  Civ.Code, § 2860.)

Conflicts of interest between the insured and the insurer are likely to occur when:  (1) the insurer disputes coverage;  (2) the third-party claim may result in a judgment in excess of the policy limits;  and (3) the insurer provides a defense under a reservation of rights.  (Foremost Ins. Co. v. Wilks (1988) 206 Cal.App.3d 251, 260, 253 Cal.Rptr. 596.)   Not every conflict of interest triggers an insurer's obligation to provide independent counsel.  (Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1394–1395, 25 Cal.Rptr.2d 242;  Native Sun Investment Group v. Ticor Title Ins. Co. (1987) 189 Cal.App.3d 1265, 1277, 235 Cal.Rptr. 34.)  “[A] conflict of interest [for purposes of independent counsel] does not exist as to allegations or facts in the litigation for which the insurer denies coverage;  however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist.   No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.”  (Civ.Code, § 2860, subd. (b).)

An insurer has an obligation to provide an insured with independent counsel when the outcome of a coverage issue can be affected by the manner in which the underlying action is defended.  (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d 358, 208 Cal.Rptr. 494;  Executive Aviation, Inc. v. National Ins. Underwriters (1971) 16 Cal.App.3d 799, 94 Cal.Rptr. 347;  Golden Eagle Ins. Co. v. Foremost Ins. Co., supra, 20 Cal.App.4th at pp. 1394–1395, 25 Cal.Rptr.2d 242.)   Conversely, an insurer has no such obligation when the manner in which the underlying action is handled cannot affect coverage.  (Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350, 2 Cal.Rptr.2d 884;  Native Sun Investment Group v. Ticor Title Ins. Co., supra, 189 Cal.App.3d at pp. 1276–1278, 235 Cal.Rptr. 34;  McGee v. Superior Court (1985) 176 Cal.App.3d 221, 226, 221 Cal.Rptr. 421;  Foremost Ins. Co. v. Wilks, supra, 206 Cal.App.3d at p. 261, 253 Cal.Rptr. 596;  United States Fidelity & Guaranty Co. v. Superior Court (1988) 204 Cal.App.3d 1513, 1523, 252 Cal.Rptr. 320.)

An insurer must provide independent counsel where the insured's conduct for which liability is asserted may be classified as either negligent or intentional and the insurer reserves its rights to deny coverage for damages resulting from intentional conduct.  (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d 358, 208 Cal.Rptr. 494;  Previews, Inc. v. California Union Ins. Co. (9th Cir.1981) 640 F.2d 1026, 1028;  Blanchard v. State Farm Fire & Casualty Co., supra, 2 Cal.App.4th at p. 349, 2 Cal.Rptr.2d 884.)   Since coverage exists for negligent but not intentional conduct, it is in the insurer's best interests to obtain a determination that the insured is not liable, but if liable, the liability is based on intentional conduct;  while it is in the best interests of the insured to obtain a determination of nonliability, but if liable, the liability is based on negligent conduct.  (San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d at pp. 367–368, 208 Cal.Rptr. 494.)   The insurer may be tempted to shape the litigation by, for example, the use of special verdicts, the apportionment of settlement, or the development of trial strategies, so as to shift the risk of loss to the insured.  (Ibid.)

In this case, appellant was sued by the Corys for intentional and negligent misrepresentation.   The Corys sought damages in excess of the policy limits and also sought punitive damages.   Insurers accepted defense of the entire action, provided defense counsel to represent their and appellant's interests, but reserved the right to refuse coverage for intentional conduct (fraud) and punitive damages.   These facts set up the paradigm case requiring the provision of independent counsel for appellant.   The conflict did not arise out of the punitive damage allegations or the demand for damages in excess of the policy limits.⁶  Nor did the conflict arise out of the mere allegations of both negligent and intentional conduct.   The conflict arose when, in the face of allegations of both negligent and intentional conduct, Insurers reserved their rights to refuse coverage for intentional conduct.   Under these circumstances, the manner in which defense counsel defended the action could affect coverage.   The underlying conduct of appellant was determinative of the coverage issue.

Concededly, it was in the interest of both Insurers and appellant that a determination be obtained that appellant had made no misrepresentation or, in the alternative, no damages resulted from any misrepresentation.   If either such favorable determination could not be obtained, however, it was in the best interest of Insurers to obtain a determination appellant had made intentional misrepresentations.   Under these circumstances, there would be no coverage under the policy.   On the other hand, it was in appellant's best interest to obtain a determination of negligent misrepresentation, which would result in coverage up to the $1 million policy limits and defeat any claim for punitive damages.   The conflict of interest in this case is patent.   Insurers impliedly recognized the conflict when they noted the coverage issues and advised appellant of her right to hire independent counsel.

Not only could, and perhaps did, the conflict affect the manner in which the trial was handled, it also could, and perhaps did, affect settlement negotiations.   For example, as ultimately settled by appellant, the claim of intentional misrepresentation was dismissed, the settlement was based on negligent conduct and no portion of the $1 million settlement was allocated to punitive damages.   Insurers noted the obvious attempt to secure coverage by the structure of the settlement and rejected appellant's efforts to so bind them.

Insurers contend, however, that at the time defense of the Cory litigation was tendered to them in 1981, neither the 1984 Cumis decision nor its 1987 codification in Civil Code section 2860 (Stats.1987, c. 1498, § 4, pp. 5779–5780), required an insurer to provide independent counsel at its expense when a conflict of interest between it and its insured existed.   We are not persuaded by this contention.

While Civil Code section 2860 is not to be applied retroactively and Cumis had not been decided at the outset of the Cory litigation, California law had long recognized the duty of an insurer to pay for independent counsel when a conflict of interest arose between it and its insured as a result of a reservation of rights.  (Center Foundation v. Chicago Ins. Co. (1991) 227 Cal.App.3d 547, 557–560, 278 Cal.Rptr. 13.)  “On April 20, 1971, Executive Aviation, Inc. v. National Ins. Underwriters (1971) 16 Cal.App.3d 799 [94 Cal.Rptr. 347] addressed the issue head on.  [¶] The insured in Executive Aviation claimed that under its policy's defense clause it was entitled to reimbursement for the reasonable value of the legal services rendered by its independent counsel retained because a conflict of interest existed between insurer and insured.   Confronting what was then an issue of first impression in California․  [¶] Executive Aviation ․ held ‘that in a conflict of interest situation the insurer's desire to exclusively control the defense must yield to its obligation to defend its policy holder.   Accordingly, the insurer's obligation to defend extends to paying the reasonable value of the legal services and costs performed by independent counsel, selected by the insured [citation].’ ”  (Id. at pp. 558–559, 278 Cal.Rptr. 13.)   Although the rule set forth in 1971 in Executive Aviation was not reiterated by any other California appellate decision until the 1984 decision in Cumis, it was utilized in the interim by federal courts applying California law.   (Previews, Inc. v. California Union Ins. Co., supra, 640 F.2d at p. 1028;  Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co. (9th Cir.1983) 724 F.2d 1343; ⁷  Nike, Inc. v. Atlantic Mut. Ins. Co. (N.D.Cal.1983) 578 F.Supp. 948.)

In addition, while it is true that the Cory litigation commenced and the original reservation of rights letters were sent in 1981, many events took place after the 1984 Cumis decision and after the 1987 enactment of Civil Code section 2860.   Summary judgment was granted in 1985 and reversed in 1986.   Another reservation of rights letter was sent, but not received, in 1988.   Settlement discussions took place in 1990 before trial commenced in May 1990.   The Cory litigation was not concluded until 1990.

Under these circumstances, it cannot be said as a matter of law that Insurers had no obligation to advise appellant of the conflict of interest or provide her with independent counsel at their expense at any time during the course of the Cory litigation, prior to the special verdicts.

“No Action” Clause and Independent Counsel

We next consider the effect of an insurer's failure to provide requisite independent counsel on its assertion of the policy's “no action” clause as a bar to an insured's action for reimbursement of a settlement.   As noted previously, an insurer is estopped to assert the policy's “no action” clause as a bar to an insured's action if the insurer breaches the policy by failing to defend the insured in a third-party action.   The failure to provide independent counsel where required in a conflict situation is tantamount to the failure to provide a defense.   Where an insured has a contractual right to a defense, the insured has a right to a conflict-free defense.

In this case, the undisputed facts establish that Insurers provided appellant with a defense tainted by a conflict of interest.   Certainly, Insurers provided appellant with a defense of the entire Cory action and hired Haight Brown to represent her.   When, however, they reserved their rights to refuse to indemnify appellant for compensatory damages resulting from intentional fraud, a conflict of interest was created, rendering Haight Brown's representation of appellant less effective by reason of its joint representation of Insurers.   The creation of this conflict of interest mandated that appellant be advised of the conflict and independent counsel be provided.   This was not done.   Insurers merely advised appellant that she could hire independent counsel at her own expense to associate with Haight Brown.   Insurers continued to control the litigation.

Insurers as defendants moving for summary judgment bore the burden of establishing a defense to the action.   They attempted to meet their burden by establishing the “no action” clause as a complete defense.   However, the “no action” clause may not be asserted where the insurer has failed to provide a defense.   Insurers failed to establish that they provided the conflict-free defense to which appellant was entitled.   Accordingly, their motion for summary judgment failed to establish a complete defense to appellant's action.   Thus, it was not necessary for appellant to establish a triable issue of material fact in order to defeat the motion.   Since Insurers did not meet their burden, they were not entitled to summary judgment.   We conclude the trial court erred in granting Insurers' motion for summary judgment.

DISPOSITION

The judgment is reversed.   Respondent Insurers are to bear appellant's costs on appeal.

FOOTNOTES

1.   This matter comes to us upon the granting of a summary judgment motion.   Thus, following the usual rules on appeal, we construe the facts in favor of appellant, the party who opposed the motion.  (Wright v. Fireman's Fund Ins. Companies (1992) 11 Cal.App.4th 998, 14 Cal.Rptr.2d 588;  Krongos v. Pacific Gas & Electric Co. (1992) 7 Cal.App.4th 387, 390, 9 Cal.Rptr.2d 124.)

2.   Appellant dismissed without prejudice a cause of action for breach of fiduciary duty.

3.   Appellant argues Insurers' notice of joinder and points and authorities were untimely and the trial court inappropriately may have relied upon the points and authorities in rendering its decision.   However, given that the arguments contained in Insurers' joinder papers merely expanded on points already raised by Haight Brown in the initial summary judgment motion, no possible prejudice to appellant could have resulted.

4.   Trial in the matter as to Haight Brown proceeded on February 22, 1994.   After appellant's opening statement, a nonsuit was granted in favor of Haight Brown and judgment was entered.   Nonsuit was granted because appellant failed to show any causal connection between any alleged acts or omissions of Haight Brown and any purported harm to appellant.   Haight Brown is not a party to this appeal.

5.   Appellant's contention the trial court failed to comply with subdivision (g) of Code of Civil Procedure section 437c is unavailing.   The trial court's order granting summary judgment pointed to the key piece of evidence, i.e., the “no action” clause of the insurance policy, concluded the settlement with the Corys was voluntarily negotiated by appellant and referenced key appellate court decisions which conclude that, if insureds voluntarily settle with third-party claimants, a “no action” clause precludes a cause of action by insureds against their insurers.   Thus, the trial court, with references to the key fact and appropriate law, directed its order to the central issue in the case.   Even were we to conclude the order was insufficient, we may still address the merits on appeal and determine if the record establishes Insurers were entitled to summary judgment.  (Avis Rent A Car System, Inc. v. Superior Court (1993) 12 Cal.App.4th 221, 224, 15 Cal.Rptr.2d 711;  Stimson v. Carlson (1992) 11 Cal.App.4th 1201, 1204, fn. 1, 14 Cal.Rptr.2d 670;  Ruoff v. Harbor Creek Community Assn. (1992) 10 Cal.App.4th 1624, 1627–1628, 13 Cal.Rptr.2d 755.)

6.   It is against public policy for an insurance carrier to indemnify an insured for punitive damages.  (Civ. Code, § 2860, subd. (b).)

7.   To the extent Zieman, supra, 724 F.2d 1343 discussed the effect of punitive damages on the existence of a conflict, it was disapproved in San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d at page 372, footnote 8, 208 Cal.Rptr. 494.

GRIGNON, Acting Presiding Justice.

ARMSTRONG and GODOY PEREZ, JJ., concur.